Employees cannot be forced to waive their right to pursue collective legal action as a condition of employment, the US Court of Appeals for the Ninth Circuit held last week.

In Morris v. Ernst & Young, the Ninth Circuit declared that engaging in concerted activity is a “core right” guaranteed to employees under the National Labor Relations Act. “This case turns on a well-established principle: employees have the right to pursue work-related legal claims together,” Chief Judge Sidney R. Thomas wrote for the three-judge panel’s 2-1 majority.

The decision is an important victory in a nationwide battle to save class-action lawsuits, which allow everyday employees and consumers to face powerful corporations on equal footing by banding together to harness their power in numbers. For this reason, class actions have come under sustained attack from powerful corporate interest groups.

Concerted Action Waiver

The plaintiffs, employees of Ernst & Young, initiated a class-action lawsuit against the London-based multinational accounting firm alleging several employment-law violations, including misclassification. Ernst & Young moved to compel individual arbitration pursuant to a “concerted action waiver” that the plaintiffs had been required to sign as a condition of employment.

Under the concerted action waiver, the employees were required to submit any legal claims against the company to binding arbitration—not a judge. Furthermore, it also required employees to resolve any legal claims only “in separate proceedings.” The effect of these two clauses was that employees “could not initiate concerted legal claims against the company in any forum—in court, in arbitration proceedings, or elsewhere,” the Ninth Circuit majority wrote.

Leveling the Playing Field: Protected Concerted Activity

The plaintiffs argued the concerted action waiver was unenforceable because it violated the National Labor Relations Act, or NLRA. Congress passed the NLRA in 1935 to correct “the inequality of bargaining power” between labor and management by protecting and encouraging collective bargaining. That goal is enshrined in the NLRA’s Section 7, which explicitly gives employees the right to organize, unionize, and collectively bargain. It also reserves for employees the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

Although the Act was originally passed to protect union organizing, it now applies to nearly all employees outside the agricultural and railroad sectors. Thus, union or not, employers may not interfere with or restrain employees’ Section 7 rights, including the right to engage in other protected concerted activities. Doing so is an “unfair labor practice” punishable under the enforcement powers of Section 8.

So it might seem obvious that forcing employees to waive their right to engage in any “concerted action” against the employer would violate Section 7. Indeed, that’s what the Ninth Circuit majority held. “[T]he right of employees to act together … is the essential, substantive right established by the NLRA,” the panel majority wrote. “Ernst & Young interfered with that right by requiring its employees to resolve all of their legal claims in ‘separate proceedings.’ Accordingly, the concerted action waiver violates the NLRA and cannot be enforced.”

The Ninth Circuit—which covers California and a vast stretch of the western United States—is the second federal appellate court to take this position. This past May, the Seventh Circuit (which covers Illinois, Indiana, and Wisconsin) released a similar decision in Lewis v. Epic- Systems Corp. It should be noted that both decisions addressed only mandatory single-arbitration clauses, i.e. those that are conditions of employment. It remains for another day to see if arbitration clauses that employees can opt out of might pass muster.

The Battle Over Collective Action Waivers

Ernst & Young is an important victory for employees, and turns the tide in a nationwide campaign by big companies to eliminate or cripple class-action lawsuits by employees and consumers through the use of aggressive arbitration clauses—particularly mandatory single-arbitration clauses—playing out under federal and state law.

The stakes are incredibly high: If employers could validly require employees to totally waive their right to engage in concerted legal activity, widespread use of such waivers would likely spell the death of the class action. Employees would be deprived of a critically important way of banding together to vindicate their rights, an especially catastrophic loss for everyday people given American labor unions’ decades-long decline shows no signs of reversing.

Federal executive agencies have come out against class-action waivers. And the National Labor Relations Board, the executive-branch body charged with interpreting and enforcing the NLRA, has held—several times—that single-arbitration clauses violate employees’ Section 7 concerted activity rights.

But the question has caused a sharp divide in the federal courts. While federal judges normally defer to the National Labor Relations Board’s interpretations of labor law (as the Seventh and Ninth circuits have), the Second, Fifth, and Eighth circuits have refused to accept the Board’s decision that single-arbitration clauses violate the NLRA.

The FAA Bait-and-Switch

The appellate courts defying the NLRB have grounded their reasoning in the Federal Arbitration Act. The FAA, passed in 1926, created a strong federal policy in favor of enforcing arbitration agreements “according to their terms.” The U.S. Supreme Court has held that a party claiming that an arbitration agreement is unenforceable under another conflicting federal statute must show that the other statute contains a “congressional command” to that effect. The appellate courts opposing the Board’s position on single-arbitration clauses have held that: (1) the FAA and Section 7 of the NLRA are “in conflict” with regard to single-arbitration clauses; (2) there is no evidence of a congressional command to exempt NLRA claims from FAA coverage; (3) therefore, the NLRA cannot override the strong pro-arbitration public policy embodied in the FAA; and (4) the National Labor Relations Board’s position that single-arbitration clauses violate the NLRA is not entitled to judicial deference.

But the logic above sidesteps the issue—and the Ninth Circuit majority in Ernst & Young exposed it as the bait-and-switch that it is. “[T]he arbitration requirement is not the problem. The same provision in a contract that required court adjudication as the exclusive remedy would equally violate the NLRA,” the majority wrote. “The NLRA obstacle is a ban on initiating, in any forum, concerted legal claims—not a ban on arbitration.” The case could still be sent to class arbitration on remand. In short, the FAA arguments relied on by the Second, Fifth, and Eight circuits were simply irrelevant.

In any event, the Ernst & Young majority held that even if the FAA did apply, it was not “in conflict with” the NLRA. Under the FAA, arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” This “savings clause” allows courts to invalidate illegal arbitration agreements without running afoul of the FAA. Since the majority found the mandatory concerted-activity waiver at issue violated the NLRA, the agreement was illegal and fell under the coverage of the savings clause. Since the FAA savings clause effectively dealt with the issue, the FAA and the NLRA were not in conflict and there was no need to go digging for “contrary congressional commands.”   

What’s to Come

“Although Ernst & Young is a win for employees in the states covered by the Ninth Circuit, this new decision highlights the ‘circuit split’ that makes it likely that the U.S. Supreme Court will end up having to decide whether single-arbitration clauses are allowed under the NLRA,” said Eric Grover of Keller Grover LLP. But he noted that the death of Associate Justice Antonin Scalia has left the Court with only eight justices. “Given that the Court is ideologically divided down the middle, the possibility of a 4-4 deadlock is real. It will probably be a year or more before the Court is back to nine members and this issue is addressed,” Grover said.